SEC looking at Hedge funds and Short Selling

Discussion in 'Trading' started by David I, Apr 10, 2003.

  1. David I

    David I

    An article on CBS.MarketWatch came to my attention concerning this and I would guess it would concern many here on ET as well.

    The title of the article is: "SEC probing hedge fund short selling - Hedge funds focus of Senate Banking hearing" by Matt Andrejczak with a last update of today at 10 am.

    Among other things it says in the article as a direct quote from the SEC chairman:

    "The commission will consider amendments to existing short sale regulation, as necessary, to curb potential manipulation by all market participants, including hedge funds, without necessarily restricting liquidity," Donaldson said.

    The article has a link to the prepared testimony (I've included the link below.) In that prepared testimony the SEC lays out it's near term plans for investigation of hedge funds and hedge fund practices, strategies and impacts including two days in May where they will gather feedback from the hedge fund industry.

    Many times it seems we find out too late that the SEC has made some decision and that we have missed the opportunity to learn about the events that led up to it or the opportunity to have input to it. Well here's some news about something that's in progress.
  2. David I

    David I

  3. pjs


    i don't imagine the sec will look into illegal manipulation on the long side.

  4. No? What do you think those Wall St firm fine were for?
  5. David I

    David I

    Don't complain months from now if the SEC makes changes to Hedge Funds or Short Selling as a result of this roundtable. This is our chance to keep in touch with what the SEC is getting it's nose into. I'll post some links below about this. Some of them are comments and papers submitted in advance by roundtable participants which are interesting to read.

    - David I

    It appears from the SEC website that this will be webcast in real time and it looks like it will also be archived for later access as well.

    The main link for all of this is:

    This will give you the two day agenda, list of participants (and it's huge!), information about the meeting and how to access it via the web, etc.

    Looking at the list of participants, two of them that submitted comments in advance looked like interesting reads to me so I'll share them here with you:

    John G. Gaine, President, Managed Funds Association
    his comments/paper can be found at:

    And then this one ...

    William N. Goetzmann, Edwin J. Beinecke Professor of Finance and Management Studies, Director, International Center for Finance
    Yale School of Management

    Paper titled "Efficiency and the Bear: Short Sales and Markets around the World"

    Abstract: We analyze cross-sectional and time series information from fortyseven
    equity markets around the world, to consider whether short–sales
    restrictions affect the efficiency of the market, and the distributional
    characteristics of returns to individual stocks and market indices. Using the
    approach developed in Mørck et al. (2000) we find significantly more crosssectional
    variation in equity returns in markets where short selling is feasible and
    practiced, controlling for a host of other factors. This evidence is consistent with
    more efficient price discovery at the individual security level. A common
    conjecture by regulators is that short–sales restrictions can reduce the relative
    severity of a market panic. We test this conjecture by examining the skewness of
    market returns. We find that in markets where short selling is either prohibited or
    not practiced, individual stock returns display significantly less negative
    skewness. However, at the market level, where regulators might expect short–
    sales restrictions to reduce the severity of broad declines, short sales restrictions
    appear to make no difference.
  6. David I

    David I

    Here's a link to the latest news about this round table as reported by CBS.MarketWatch:{2DD8B32A-343B-4DAC-8A6F-AF1C98921931}&siteid=mktw

    A couple of interesting quotes from the article:

    "The SEC is using the roundtable to decide if it should apply new rules to the lightly regulated but fast growing industry."


    "The probe has created a stir in the hedge fund industry, but SEC Chairman William Donaldson has been noncommittal about what direction the SEC will take.

    "I don't think anyone knows where the SEC is headed or the timetable," said attorney Robert Helm, who represents hedge funds at Dechert LLP in Washington D.C."
  7. Short selling was one of the "scapegoats" for the crash of 1929.

    Program trading took the rap in 1987.

    There will always be some group looking to pin a "strategy' for the misfortunes of the market (and the losing participants) at any given time.

    Selling short is part of the what the stock market is about. Always has been and always will be. The uptick rules exist for legitimate reasons. But even so, there is no "uptick" kind of "safeguard" in the futures or options markets. Selling before buying is done in almost every business in America.

    If you order an automobile that is not in stock, the dealership is shorting the car.

    You are a pencil salesman, and you take an order for 1000 pencils with some logo on them. You are selling them short. (Unless of course you happened to have pencils in stock that incredibly, for example, already have "Max401 Rocks" engraved on them. But really, what are the chances?)

    Just business as usual. Now hedge funds are the bad guys. Too bad. The only real problem is that now hedge funds have been brought to the public's attention. I remember less than 15 years ago, if I used the term, no one had a clue what a hedge fund was. They were around. They just weren't in the public's consciousness.

    And the truth is, in those days, many of the "hedge funds" neither "hedged", nor were they truly "funds" (in the sense they were open- ended investments). They were just buying IPO's on a DVP basis. And making a lot of money. That was the beauty of them. They could do whatever worked. They had "private placement" type requirements as far as customer suitability, and I believe they still do. Which makes it a fair game. Widows and orphans need not send in their rent money. There are plenty of "respectable" mutual funds for them. Like the Franklin Fund my mother invested in 13 years ago. A government bond fund. Which has dropped in NAV by 40%. Explain THAT to me in an environment where rates have done nothing but go down???:confused: :confused: :confused:

    Wish I had known about this sooner. I have called Franklin, and I never heard so much double talk in my life...the questions will not stop until I get her some answers. Hope I live long enough. Let alone my mom! I am not very hopeful. Basically, she got stuck with a shitty fund, and there is no recourse. Inexcusable? Yup. Illegal? Seems like it should be, but very doubtful.

    Peace, and stay away from Franklin Funds..they not only suck, they give "suck" a bad name. They seem to have accomplished the impossible. - 40%? Gets me dizzy thinking about it!

  8. The short have been introduced after the 1929 crash by the SEC (1933 if I remember correctly) as a process for to limit the upside and avoid another crash.
  9. Rather than waste all this time and effort investigating and the money that will be spent on hearings, political contributions and bribes, why not just mandate a giant warning label on any media running any story about the market:

    WARNING!!! The stock market is utterly corrupt. Any advice, opinions or purported factual statements you hear or read are most likely false, biased or paid for by someone with a vested interest. In the unlikely event they are not, the person making them is probably an idiot anyway and should not be relied upon. If you disregard this WARNING and lose money, you have only yourself to blame.
  10. The twin babies, mutual funds and corporate America, are soiling their diapers because the hedge funds kicked their asses the past few years. So why won't regulation work? Because the accredited investors are the rich and powerful themselves, and they invest in hedge funds! The battle will be interesting though. I see that Clinton's former lawyer Lanny Davis is going after Greenlight Capital because of some negative comments the manager made about a company. You know when a scumbag like Davis gets involved that the shysters are trolling for a new target: hedge funds. Fine, go after them. Chase them offshore. Dumb fucking politicians.
    #10     May 14, 2003